How to Protect your Personal Assets as a Business Owner

by LegalVision - Nessim Malak

Starting a new business is a both challenging and exciting personally, professionally and legally. Therefore, as a new business owner, you should separate personal assets and the liabilities of your business. Sometimes, the boundaries between your personal and business lives are so blurred that it is hard to separate the two. This article will help you limit to overlap in order to protect your personal assets and ensure your business goals are realised.

Selecting the Right Business Structure

There are four common business structures to choose from:

  1. sole trader;
  2. partnership;
  3. company; or
  4. trust.

There are multiple tax-planning considerations, but operating as a sole trader or through a partnership are not the best asset protection options (unless, for example, you participate in a partnership through an entity such as a company). As a sole trader or an individual partner in a partnership, your personal assets are completely exposed to business liabilities. Therefore, you should choose a structure that offers you ‘limited liability’, such as a company or trust. You may even wish to utilise both for added security and a greater degree of separation

Company Structure

A company is its own legal entity. Therefore, individual shareholders are only liable for debts or liabilities that the company incurs up to the amount unpaid on their shares (which is commonly zero).

This limited liability makes the company structure suitable for high-risk businesses. Company structures also make it easier to raise capital when it is time for your business grow, through issuing shares.

Dual Company Structure

A dual company structure involves holding a company that owns 100% of the shares in a subsidiary operating company. An operating company is the entity that enters into contractual arrangements with:

  • clients;
  • suppliers; and
  • employees.

A dual company structure adds an extra layer of protection as, in most circumstances, the holding company generally owns your business’ major assets (such as intellectual property (IP) and excess cash), away from any liability that the operating company incurs.

For example, if a customer sues your business, they will have to sue the company they have the legal relationship with (i.e. the operating company). In a dual company structure, an operating company will hold fewer assets than the holding company, so your most valuable assets will have greater protection.

Trusts

A trust can be used to run a business. A trust may have an individual or corporate trustee. The trustee controls the trust and distributes profits to the beneficiaries of the trust, in accordance with the trust deed.

If a trust has an individual trustee, the trustee will be personally liable for the trust’s debts. If a trust has a corporate trustee, the company’s shareholders receive protection through the company’s limited liability. While a corporate trustee allows for these additional protections, it requires you to incorporate another company and increases your setup and maintenance costs.

Founders can also use a discretionary trust to own their shares in their business, which provides the following benefits:

  • asset protection: The assets of a discretionary trust are distinct from the assets of the beneficiaries of the trust. Therefore, you can protect them from creditors in circumstances where a beneficiary is sued or made bankrupt or insolvent; and
  • tax planning: By distributing income and capital to beneficiaries on lower marginal tax rates and distributing different types of income to different beneficiaries (i.e. “streaming”) the overall tax paid by a family group could be reduced. Each beneficiary pays tax at their marginal rate on income distributions received from the trust in each financial year.

Maintain Your Corporate Veil

Although you have the added protection of limited liability, if you incorporate a company, the court can, in exceptional circumstances, ignore this separation by “piercing the corporate veil”, holding directors personally liable.

Although rare, directors may be held personally liable if they:

  • use the company as a sham, to mask the true purpose of its controller(s);
  • use the company to avoid an existing legal duty; or
  • breach their directors’ duties.

Purchase the Proper Insurance

Having the appropriate business structure in place is not enough to protect your personal assets. You should ensure you get the right insurance policy to protect your assets in the event of any claim against you.

If you are a company director, ensure you are covered by a directors and officers (D&O) insurance policy and have signed an indemnity deed (also known as an officer protection deed) with the relevant companies.

Additionally, you should take out, and maintain, a professional indemnity insurance policy while you are in the business and for seven years after leaving the business. If your business has a policy, carefully review it. Pay particular attention to any special conditions and exclusions.

You may also wish to consider taking out an ‘umbrella liability insurance’, which functions as an “umbrella” over any other type of insurance you may carry.

Make Superannuation Contributions

You should make sure that you are a member of a regulated superannuation fund and establish a pattern of superannuation contributions by making both concessional and non-concessional contributions. Maximising concessional contributions will minimise assets exposed to creditors’ claims and maximise your tax benefits.

If you have a self managed super fund (SMSF), you should ensure that it has a corporate trustee, not individual trustees.

Move Assets to Family Members

Another strategy is to transfer assets away from you, as the person involved in the business. Generally, your creditors will not be able to reach your spouse’s assets.

For example, you may wish to buy your family home in your spouse’s name, minimise your contribution to the purchase and ensure that any home loan is in the name of your spouse. You may also wish to transfer your savings or investment accounts to your spouse, provided your spouse is in a business that carries less risk.

However, transferring existing assets may give rise to tax or duty implications. Further, to the extent that transactions are not at market value, the claw-back provisions under the bankruptcy rules may apply.

Protect Your Intellectual Property

Your intellectual property (IP) is your most valuable asset. While you may have owned the IP personally in the early stages of your business, ensure you have assigned it to your company. To do so, you will need an assignment agreement.

However, while it’s best practice for your business to own its IP, this places your IP in the firing line if a client makes an adverse claim against you. In order to insulate your IP from your company’s day-to-day commercial activities, assign your IP to the holding company if you opt to have a dual company structure.

Holding companies usually control and own the entire IP portfolio of a common company group, which may include trade marks, patents, copyright, and designs. The holding company will own the IP and license it to the operating company.

Have the Proper Contracts in Place

The most effective tool for protecting your business, and potentially your personal assets, is by having a suite of documents that define your relationship, and limit your liability, with all relevant stakeholders.

Key Takeaways

Asset protection strategies rarely work unless they’re implemented well before any adverse claims or liabilities arise. Strategies to protect your personal assets when doing business include:

  1. selecting the right business structure;
  2. maintaining your corporate veil;
  3. purchasing the proper insurance;
  4. making superannuation contributions;
  5. moving assets to family members;
  6. protecting your IP; and
  7. having the proper contracts in place.

If you need assistance protecting your assets, contact LegalVision’s business lawyers on 1300 544 755.



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